Friday, April 16, 2010

Did FDR End the Great Depression?

My prediction is that politicians will eventually be tempted to
resolve the [fiscal] crisis the way irresponsible governments usually
do: by printing money, both to pay current bills and to inflate away
debt. And as that temptation becomes obvious, interest rates will soar.
- Paul Krugman, 2003

Funny how the worm turns: now Krugman is cheerleading for inflation. Our economic leadership seems to have no way out of chronic budget deficits other living with them and turning Japanese, or inflating the burden away.

It is too large to be eliminated with income tax increases. Brookings estimates the top rate would have to go to 91% to get to a 2% chronic shortfall. At 77%, it would leave a 3% shortfall.

Both of these estimates assume the huge tax hike does not hammer future GDP growth, and that higher rates can increase the Federal tax take from 18% to 22% of GDP. History of rate changes, however, has has shown that changing rates does not modify appreciably the income tax take of around 18% of GDP. Instead, it slows or speeds up GDP growth. Higher rates, slower growth - and the gap does not close even to 2-3%.

Inflate or confiscate - which poor choice is it to be?

There is an alternative which has been tried three times in dire situations and worked each time. It is a sad commentary on the sorry state of our political discourse that the party in power will not even countenance the debate over the alternative, so in thrall they seem to be to a long-dead economist (Keynes). We may end up where we were in 1920 and 1980: having to finally apply the alternative after the inflation remedy gets out of control.

We know what happened in 1980: a tough Fed chair combined with tax cuts ended the Great Inflation that started with LBJ and spiraled out of control under Jimmy Carter. The Great Moderation followed for 25 years.

Less is remembered about 1920, when we had double-digit inflation and high interest rates coming after WWI and Wilson's Democratic Party interregnum between many years of Republican rule with sound money policies. Harding took power amidst 15% unemployment and GDP falling off a cliff worse than we saw in 2008. Harding's Commerce Secy, Herbert Hoover, coming off a government position managing part of the recent war effort, tugged at the new President's sleeve urging Intervention! Spending! Harding wisely ignored him, cut taxes, cut spending, tightened money, and ended his Great Recession in ten months. The Roaring Twenties followed.

Even less remembered is what happened in 1945, at the end of WWII. The WSJ revitalized the history of the end of the New Deal in a recent op-ed, Did FDR End the Great Depression? FDR was convinced the only way to employ the 12 million returning soldiers was another New Deal program, but he died before he could impose his plan. The new President, Truman, proposed it (and note, this is when Truman is said to have pushed for national healthcare), but as the article explains, it was soundly rebuffed:

Congress—both chambers with Democratic majorities—responded by just
saying "no." No to the whole New Deal revival: no federal program for
health care, no full-employment act, only limited federal housing, and
no increase in minimum wage or Social Security benefits.

By the late 1940s, a revived economy was generating more annual federal
revenue than the U.S. had received during the war years, when tax rates
were higher. Price controls from the war were also eliminated by the end
of 1946. The U.S. began running budget surpluses.

Unemployment had remained double-digit throughout the whole New Deal. One year after the end of New Deal policies and the return of economic freedom, it was under 4% despite the huge return of soldiers.

As with FDR then, we have Krugman now, pushing a new New Deal. Peter Shiff takes Krugman's arguments head on and shreds them. Here is the key argument on both sides:

In simple terms, Krugman believes that inflation is the best cure for burdensome debt problems. To prove his arguments, he points to the course followed by the United States in the decade after the Second World War. In 1946, due to unprecedented military spending during the war, U.S. public debt as a percentage of GDP came in at a staggering
122 percent – which is even higher than the 113 percent currently weighing on Greece.

Krugman endorses U.S. policy at the time which, he claims, concentrated on fostering growth instead of taking measures to drastically cut the post-war debt. He notes that by the end of 1956, the federal debt had not diminished in nominal terms, but had become much easier to bear because of the decade of GDP growth that inflationary
policies had created.

He neglects to mention that during the five years from 1945 to 1949, federal spending dropped by 58% and taxes fell by 12%. Meanwhile, the budget deficit fell by 66% in 1946 and was in surplus from 1947 to 1949. In other words, although we did not pay down our nominal debt in the decade after the war, we did succeed in massively shrinking government and the burden that it places on society. Could it be that this had something to do with the post-war boom, or should we give all the credit to the monetary policy? (It is important
to point out that our national debt did initially decline from 1945 to 1949,but the extra spending necessary to finance the Korean War reversed that trend.)

Back to the Future,,1987 ?? Also a large decline on options expiry day on October 16. 1987 ..The Market was also extended ..only missing part today, was a sharp decline at the close.
We will see Monday

In a last ditch effort to save this bull market by egging on the invisible gremlins on my shoulder (whose sole purpose of their existence is to prove what I think or say to be wrong), I SERIOUSLY THINK THE TOP IS IN NOW.

I look for certain harmonic balances in time and price of adjacent swings. My personal recipe squares price and time, uses fibonacci and arcs. The method sometimes errs by finding harmony at interim tops along the way to the final, which really sucks and I hope I can really solve that one day. This could happen here. (So you mind as well not bother to listen to me anyway, especially if I am as incompetent as my wife has proved me to be, very deftly.) But we've been going one way for quite a while, so the longer the trend continues, the more rarefied becomes the confluence to lock out a swing.

We are very harmonious for a top NOW. It can squeak a little higher over the next few days if it must, but not by much and not into May.

I rely on Yelnick to announce if any EWT pundits are seeing a top now, and don't think I've heard anyone yelling from the rooftops.

I'm yelling from the rooftops.

Why would anyone be such a moron to do put themselves out there like this? Besides immature egoistic wankerism I mean?

Here are some charts showing the closest I can come to making sense of where we are wave-wise. We reversed in the time and price zone I had been thinking (that wave-.F and wave-.G may need modification, but we're in the ballpark, nonetheless), but I have no idea of this reversal is the end of something big or not. Some of these quick drops just turn out to be x-waves or the B-waves of Neutral Triangles and lead to new price highs. The safe bet is to say that it's not something big, of course, but I definitely respect that you're going out on a limb. I'm still short from lower levels with an initial stop just above 122, so a major reversal of trend would finally enable that trade to become profitable!

I saw your post over in the other thread calling for more debate in this thread, so here's my take. No, FDR didn't end the Depression, but you will never convince anyone who believes he did otherwise because it's a theoretical question which requires that you understand the "broken window" fallacy. Since most people only understand what they can see, what is unseen is hardly ever understood.

If you try to explain to someone that yes, the Great Depression ended after the New Deal, but not because of it and would have ended faster if the New Deal hadn't been put into place, you are making an abstract argument which is sound in theory, but lacks the concreteness of what actually happened.